Tuesday, February 28, 2012

Whistleblower Cases and the Criminal Process (2/28/12)

Readers are at least generally familiar with the whistleblower provisions in the Code.  See Section 7263, here.  I have written on them before.  (See the Whistleblower tag below for the blogs on the subject.)  Very briefly, one provision is for a discretionary award.  The other, more potentially lucrative provision, is for a minimum of 15% of taxes, penalties and interest collected, with a discretionary further award between 15% to 30% (with a 30% maximum after the exercise of full discretion).  This latter provision came into the Code in 2006 and, for reasons to be noted, we do not yet have much anecdotal evidence of major awards.

This is not the appropriate place to address the details of that program and the limited anecdotal data (including the annual Whistleblower Office reports), but in a recent meeting, the director of the Whistleblower Office spoke.  A report of his comments is at Jeremiah Coder, IRS Whistleblower Office Implementing Improvements, 2012 TNT 35-13 (2/22/13).  Here are some key parts of that article:
Complaints about how long it takes to close whistleblower cases are unlikely to end anytime soon. Whitlock said the audit process for high-dollar cases takes longer given the complexities of those cases and the opportunities for taxpayers to appeal. While officials originally expected that high-dollar claims awards would be issued within three to five years of claim submission, it now appears that the payout time frame is likely five to seven years, because the IRS cannot pay an award until the underlying tax liability has been collected, he said.
And, as respects the interface of the whistleblower information with the criminal process:
When it becomes clear during the intake process that a case is criminal, the case is passed along to the IRS Criminal Investigation division, Whitlock said, adding that during the audit process, other whistleblower cases can be referred to CI after consultation with a fraud technical adviser. Whether the Justice Department will grant a whistleblower immunity in a criminal probe depends on the individual's role in the noncompliance, he said.
Just a couple of comments:
  1. The time frame for processing sounds about right given the time to develop the case in the audit and then let the taxpayer thrash around with it as it will (I say it because most of these will be entity taxes or, if a partnership, subject to the entity audit and litigation rules).  Note that, if during the process, the case were to turn criminal, it might well be that the lead time until collection with no right to refund may be extended further as the civil process slows down or stops altogether which the parties thrash around with the criminal investigation and further proceedings.
  2. The last sentence in the last quote may partially explain the treatment of the hapless Mr. Birkenfeld who, you will recall, was prosecuted and sent to jail despite the fact that he delivered to the Government  UBS's skulduggery almost on a civil platter.  He did participate in the type of skullduggery that UBS orchestrated.  And, so the story goes, he was not totally forthcoming.  So the Government prosecuted.  The open question is whether he will qualify for a whistleblower reward.  If so, it could be a very big one.
Addendum 3/2/12:

Erika Kelton, , IRS Whistleblowers See Little Reward (Forbes 3/2/12), here
Whistleblowers and their lawyers also are frustrated that the IRS has created a black hole for whistleblower claims, so they get little or no information about the claims’ status. Perhaps the paramount frustration, however,  is due to the apparent unwillingness of the IRS to take advantage of whistleblowers’ expertise and allow them to assist the IRS in certain, limited circumstances.  This assistance clearly is contemplated by the 2006 law and could be allowed without violating confidentiality restrictions through the use of special confidentiality agreements known as “6103(n) contracts.”  Why the IRS has ignored resources that it is free to tap is a mystery, especially as the agency suffers through staffing cutbacks. 
Contrast the IRS attitude with that of the Securities and Exchange Commission, which 
welcomes the help of whistleblowers under the SEC’s 19-month-old whistleblower program, and the Justice Department, which has a longstanding public-private partnership with whistleblowers to combat frauds against the government through “qui tam” lawsuits brought under the False Claims Act. An SEC enforcement official told Congress last year that high-quality whistleblower information had saved the SEC six to 12 months of investigative time on a matter the SEC only learned about from that insider. The IRS could benefit in the same way from whistleblowers. 
Potential whistleblowers, particularly those in the executive suite, are well aware that only one known award has been made under the program in five years.  Seeing that chances of a reward are hampered by the IRS’s attitude, a painfully slow bureaucracy and an attitude that shuns needed help, whistleblowers are thinking twice about risking their livelihoods to come forward.  The statistics in the IRS Whistleblower Office’s 2010 report to Congress confirm that there has been a drop in the number of whistleblower submissions.
Addendum 3/10/12

Best Practices in Pursuing IRS Whistleblower Claims: An Interview with IRS Whistleblower Office Director Stephen A. Whitlock (False Claims & Qui Tam Quarterly Review April 2009), here.
This is an interview in which Mr. Whitlock shares some unique insights into the administration of the tax whistleblower provisions.

21 comments:

  1. Excellent discussion and comments.

    I have the following to add:

    1. If the subject(s) of any alleged nonpayment(s) or underpayment(s) decide(s) to post(s) a "cash bond" in accordance with the applicable law, the time frame could be extended for a significant amount of time. Perhaps even indefinitely.

    2. A Whitleblower who serves up the case to the IRS (or any federal, state, tribal or local government agency or entity, for that matter) on a "civil" platter may very well end up exposing himself/herself to federal and state criminal prosecution for tax as well as non-tax offenses. Anything the Whistleblower says to anyone, including the IRS, can and will be used against him or her in connection with any criminal or civil matter(s).

    3. A Whistleblower may open himself/herself up to impeachment at any hearing, trial or proceeding. Indeed, a cursory look at the Federal Rules of Evidence (laying aside state evidentiary rules or other bodies of potentially applicable law) suggests that "Whistleblowing" should be approached cautiously, delicately and always with the guidance of competent white collar criminal defense counsel.

    4. I would suggest that there may be instances in which a given Whistleblower could (by and through his/her actions, inaction or imprudence) potentially waive such evidentiary privileges as the attorney-client privilege and work product immunity.

    5. Further, I would think that the very idea that an adverse party could argue and a judge could determine that a given Whistleblower's conduct somehow falls within the scope of the crime/fraud exception to the attorney-client because such conduct is an integral part of a "continuing offense" or evinces an intention to commit a "future offense", should give any actual or prospective Whistleblower and his/her legal counsel plenty of cause for pause.

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  2. Good post and observations Jack.

    I would agree with Anonymous@feb 28, 2012 02:56, pessimistic view of the world if the whistleblower is deeply involved in criminal wrongdoing a la Mr. Birkenfeld. A criminal lawyer may view the world more darkly that it actually is--he or she is, after all, seeing all criminal cases, and therefore his view may be somewhat imbalanced. Certainly, in those extreme cases, I agree that whistleblowers should think long and hard before bringing their case to the attention of the IRS.

    But I suggest we temper our views to the norm, not the extreme. I respectfully suggest that most incidences of tax whistleblowing, at least those that I have seen, do not involve criminal wrongdoing in and of itself, or that the whistleblower is not the principal protagonist for that wrongdoing if it exists in the first place. In those cases, my experience is that the risk of criminal prosecution is non-existent if the whistleblower is candid about his or her involvement and cooperates fully with the IRS (which M. Birkenfeld did not do).

    The whistleblower's involvement in the tax malfeasance may, at the end of the day, result in a reduced reward for him or her, but a lower percentage of a lot is still a lot. The risk/reward calculation, in those cases, weighs very much in favor or bring the case to the attention of the IRS.

    To be clear, I do think that those deeply involved in criminal tax situations should be extremely careful with going to the IRS with their situations, but I believe that most whistleblowers will not be overly exposed on that front.

    Perhaps a good thought might be that if you need to consult a criminal tax lawyer before approaching the IRS, that action should indicate pretty strongly what you should do: absolutely nothing except pray!

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  3. I appreciate the Gist of Patrick's comments. I can certainly respect his viewpoint that white collar criminal defense counsel are generally inclined to view Whistleblowing with different lenses than most professionals including accountants or transaction lawyers.

    I have a few thoughts. The "A" word. Ambiguity. Very briefly, it appears that most Whistleblowers are not just innocent bystanders. Indeed, I think it is fair to say that most Whistleblowers have had at least some measure of participation in one area of wrongdoing or another.

    The IRS's representation that they do not intend to prosecute a given Whistleblower should be given a good deal of weight. However, such representations are not binding on any other governmental entity, including but not limited to the United States Department of Justice, the various United States Attorney's Offices or any state, tribal or local prosecuting office(s). Indeed, I believe that one cannot safely regard such representations, or "private assurances", if you will, as the basis for any "estoppel" type argument(s) aimed at preventing any kind of criminal prosecution. See Federal Crop Insurance Corp. v. Merrill, 332 U.S. 380 (1947) (anyone relying on a government official's purported authority takes a huge risk that such official has acted outside of or in excess of his or her authority).

    Moreover, a Whistleblower can be exposed to having to confront scathing cross-examination in any appropriate case or proceeding. Among other things, he or she can count on a sharp attorney exploring his or her background, work history, social history, lifestyle, associations, motives, many other things beyond the scope of these comments.

    Today's white collar investigators, prosecutors and defense attorneys build their cases and defenses by, among other things, constructing mosaics from ambiguities.

    Furthermore, I have been told that there are some experienced investigators, lawyers and journalists out there who are extraordinarily deft at twisting the most innocent, straightforward statements into the vilest of falsehoods.

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    1. Agreed. As I mentioned above, if a prospective whistleblower thinks he or she should consult a criminal defense attorney before blowing the whistle to the IRS, he or she should think long and very hard about the whistleblowing, for all the reasons that Anon. provides. And bear in mind that conviction of a crime for the reported transaction extirpates all reward, which may end M. Birkenfeld's dollar dreams.

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  4. Question for criminal tax attorneys: Is the DOJ under a duty (using the word loosely) to mitigate loss to the Fisc by prosecuting those involved in criminal tax evasion, if, by doing so, the reward that would otherwise be payable by Treasury to the whistleblower is abated?

    As I noted above, if the whistleblower is convicted of "criminal conduct" in connection with "planning and initiating" the reported situation, the reward amount is abated entirely. The IRM has a broad take on what it means to "plan and initiate" and would cover minor players by its terms, and convicted of "criminal conduct" would cover misdemeanors as well as felonies. So wouldn't there be a temptation to take criminal action to stop the payment of reward?

    Any ideas?

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    1. IRSwhistleblowerexcalibur@yahoo.comMarch 2, 2012 at 6:47 AM

      In the matter of the interface between the Criminal and Civil divisions and the 5-7 year time frame to settle a whistleblower case......

      Hypothetically...... what would happen to a fairly straightforward whistleblower case, in terms of that time frame, if the IRS Criminal Division got the case first through CI Special agents operating out of one of CI's 10 offices located in US embassy's around the world. The evidence of undeclared offshore companies, fraudulent letterheads, bank accounts, commercial transactions and trademark registrations etc etc was overwhelming in supporting the undeclared income.

      First CI commences its investigation into an individual, no indictments are laid, the Justice Department does not get involved for the first 3 years. Meanwhile a parallel investigation \ eggshell audit is initiated where the civil division does an audit on a closely held US registered corporation in which the individual has a majority shareholding.

      Would this type of interface between Criminal Division and the Civil Division slow things down to more than 5 years even though it's, hypothetically, a straight forward case of unreported offshore income without any sophisticated tax avoidance \ evasion schemes?

      Surely, if handled correctly and the matter was not compromised during the parallel investigation\ audit, given the Criminal Divisions greater investigatory powers together with a plea bargain wouldn't it actually speed things up?

      Incidently, Stephen Whitlock the Director of the program stated in Tax Notes that the Whistleblower office is becoming more efficient.
      According to the Status Report on the GAO website, some 6 months after the GAO issued its critical report on the mismanagement of the Whistleblower Program, the IRS has not implemented any of the GAO's recommendations. James White at the GAO continues to monitor the lack of implementation and will report to Congress.

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  5. The following is copied and pasted directly from the United States Department of Justice's Tax Division's website (Available at: http://www.justice.gov/tax/what_we_do.htm) (Last Visited 030112). It is in the nature of "raw data" sourced directly from the foregoing site. It is offered solely for educational and informational purposes. It is not intended to be any kind of legal advice, analysis, counsel or guidance for anyone's consumption. Accordingly, the reader may draw any inference(s) he/she wish(es) and interpret it at his/her own discretion and risk.

    _____________________________________________________

    WHAT WE DO

    The Tax Division handles or authorizes most civil and criminal litigation that concerns or relates to the internal revenue laws in federal district and appellate courts. Tax Division attorneys seek to secure correct, uniform and fair interpretations of the internal revenue laws and to ensure that uniform standards are applied in criminal tax prosecutions. Tax Division attorneys work closely with the Internal Revenue Service and United States Attorneys' Offices to develop tax administration policies; handle civil trial and appellate litigation in federal and state courts; pursue federal grand jury investigations; and handle criminal prosecutions and appeals. To the greatest extent possible, the Tax Division coordinates the use of both civil and criminal enforcement tools, to maximize the deterrent effect of its litigation and to enhance collection efforts.

    Significant recent Tax Division initiatives include the following:

    Attacking the use of "secret" foreign bank accounts to evade taxes

    – Enforcing IRS summonses for records of offshore credit card transactions
    – Initiating criminal investigations of suspects in offshore tax evasion cases

    Halting the spread of abusive corporate tax shelters

    – Defending in civil proceedings the IRS’s disallowance of sham tax benefits
    – Prosecuting professionals who knowingly promoted and facilitated illegal tax shelter transactions that defrauded the IRS

    Investigating and prosecuting individuals and corporations that attempt to commit tax fraud or evasion


    Combating the tax defier movement

    – Prosecuting tax defier cases
    – Providing prosecutors and investigators with litigation advice, trial strategy guidance, and sample pleadings in tax defier/sovereign citizen cases
    – Working with IRS, Treasury Inspector General for Tax Administration, FBI, and the DOJ National Security Division to coordinate training and litigation of tax defier/sovereign citizen cases
    – Seeking injunctions in tax defier promoter cases

    Shutting down fraudulent tax return preparers

    – Investigating and prosecuting tax return preparers who willfully prepare false tax returns
    – Seeking civil injunctions to bar fraudulent return preparers from preparing returns
    – Working with IRS to conduct training on gathering evidence about fraudulent return preparers

    Fighting abusive and fraudulent tax promotions

    – Seeking civil injunctions against promoters of abusive tax schemes
    – Investigating and prosecuting major tax fraud promoters
    – Working with the Federal Trade Commission to combat internet fraud schemes

    Combating schemes that cheat the IRS through abuse of the bankruptcy system

    – Challenging the discharge where the debtor made a fraudulent return or willfully attempted to evade or defeat the tax
    – Making criminal referrals of suspected bankruptcy fraud

    Enhancing policy coordination between the Tax Division and the IRS

    Source: http://www.justice.gov/tax/what_we_do.htm

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  6. The delays in paying rewards to IRS whistleblowers are not just administrative in nature. There is something going on under the radar that has escaped most peoples' notice.

    IRS Commissioner Shulman, 2008 a Bush appointee, has demonstrated a hostility toward whistleblowers (entirely consistent with the Bush Administration's philosophy) and has played a role in impeding these claims. His hand-picked chief legal counsel drafted some of the internal regulations regarding the implementation of this 2006 law (15%-30% rewards).

    A critical change in the 2006 law was to change the prohibition against those who "participated in" the claimed fraud. Post-2006, those who participated in the fraud could now collect the rewards as long as they did not "plan and initiate" the fraud being reported on. This is a critical change. Now, only the kingpins who planned andinitiated the fraud were barred from rewards.

    IRS Commissioner Shulman's chief counsel then drafted regulations which purportedly sought to define "planned and initiated", as contemplated in the new law. However, a clear reading of his regulations by even a grade school student makes it clear that his definition of this phrase was an obvious attempt to do an end-run on the new law, to try to essentially nullify this new provision.

    In a rather transparent manuever, these regulations essentially define "planned and initiated" as somebody who "participated in" the fraud. It is clearly contrary to law. Go read these regulations for yourself and see how the English language is turned on its head. It's right out of Alice in Wonderland. It is clear that IRS Commissioner Shulman and his chief legal counsel are hostile to this new law.

    When the author of the new law, Senator Charles Grassley, caught wind of this dubious effort, he sent a blistering letter diretly to IRS Commissioner Shulman in the fall of 2011. In very blunt terms, Senator Grassley not only let Shulman know what he was up to over there at IRS, but he went out of his way to make clear what he, the author of the law, meant by "planned and initiated" when he wrote the law. He said it meant exactly what the ordinary words meant and clearly implied that these specific new regulations that were drafted by IRS chief counsel on "planned and initiated" were both bogus and irrelevant.

    So you wonder why there are so many delays in the IRS making rewards? It's not just administrative delays but bureaucratic bad faith meddling.

    By the way, a review of the record makes it quite clear that a main reason why the UBS Whistleblower, Bradley Birkenfeld, was even charged was to undercut his whistleblower status. The Bush prosecutors in the Tax Division of the Justice Department spoke to reporters, anonymously, expressing contempt for Birkenfeld getting a reward, just as they had on the very first day that Birkenfeld met them face-to-face in June 2007 at the DoJ (when he voluntarily walked in there to expose the UBS fraud).

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    1. Interesting comment.

      When you say regulations, do you mean the Internal Revenue Manual (IRM)? If so, the IRM does not have the power of regulation and does not have authoritative effect.

      That said, I take your point that the IRM has a broad definition of "planned and initiated." Since this is phrase that seems to have been borrowed from the FCA, I suggest that you write an article on the topic for publication in one of the major tax journals.

      Tax lawyers and accountants handle IRS whistleblower cases and, may not be familiar with the applicable FCA authorities and interpretations on the topic. A well-reasoned article would help out those who are faced with the problem of what planned and initiated means, and help to undermine the IRM position, if you believe it to be incorrect.

      Writing that "this person says this," and "that person says that," carries no persuasive weight, especially before highly analytical Federal judges who will ultimately decide this issue.

      Equally stating that the words have a plain (narrow) meaning on their face is simply not correct--all I read is that there are two requirements: the WB "planned" to do something and did what he or she planned ("initiated") which can cover any number of actors, including Mr. Birkenfeld, however unfair that may seem to those who applaud what Mr. Birkenfeld did and for whatever reason he reported the UBS conduct, me included.

      An analytical approach to the issue, I suggest respectfully, would achieve much more than knocking Comm. Shulman and OCC, unfairly in my opinion. Personally, I think the oft-repeated claim of nefarious conduct by the OCC (and here Comm. Shulman) is a load of hogwash if for no other reason than there are too many eyeballs focused on WB cases for Fed. officials to take career-destroying risks of meddling, no matter what their personal views might be. And I have read that many of tax WB cases may also be examined by NYS's AG FCA, the SEC and possibly other investigative bodies, which would inevitably highlight any IRS misconduct.

      Perhaps I am missing something though?

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  7. Isn't it reasonably clear that Mr. Birkenfeld was a "planner and initiator" under a reasonable interpretation of the WB statute?

    For many years, Mr. Birkenfeld's career involved targeting wealthy Americans for UBS, a career in which he was highly successful. According to the media reports, he was paid a base salary and an enormous commission based on the amount of Americans he recruited to the UBS scheme. He had multiple expensive homes, and enjoyed the typical baubles that his successful recruitment of wealthy Americans generated, conduct that he must have known was illegal. According to the 60 Minutes piece he shipped diamonds in toothpaste tubes--a kind of elementary money laundering, I suspect.

    To promote his successful career, he planned out which Americans to recruit to the UBS scheme, he followed up on those whom he targeted, and he received substantial compensation for his efforts, implying he was very successful in his recruitment efforts. Why on God's green earth would that not be reasonably considered a type of "planning and initiation" contemplated by a WB reward statute? From my perspective, he is the essence of a tax shelter promoter, whom we all pay the price for in higher tax rates.

    And he knew, or should have known, that his deep involvement might cause him to be categorized as a "planner and initiator" for purposes of the IRS reward program.

    In my humble opinion, it is unfair, more than a little ironic and perhaps hypocritical, that the IRS should face such blistering criticism for protecting the Fisc, including on the issue of what a whistleblower should be rewarded for bringing a scheme to the attention of the IRS. Sure Mr. Birkenfeld was instrumental in bringing down the UBS scheme. However, Mr. Birkenfeld was equally instrumental in creating and continuing that same UBS scheme, and operated effectively and as a principal actor within this criminal scheme while it lasted.

    The claim that the scheme would not have been brought down were it not for Mr. Birkenfeld is highly questionble, I submit. He simply got there first--not to be dismissed, but not to be over-weighted either. There would have been many who would have come forward to report the UBS scheme, and others like it.

    Even where statutory rewards are unavailable, such as in the UK, Germany and France, whistleblowers are negotiating sales of tax avoidance/evasion information to taxing authorities, so....

    There are many, many people out there who are fed up with, and frustrated by, the daily media beat of tax avoidance/evasion by well-informed, aggressive US taxpayers. Unfortunately, for those who thought tax laws do not apply to them, many of those people have information that would be very helpful to IRS and DOJ efforts and most of their situations will not be as compromised as Mr. Birkenfeld's was when he came forward.

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  8. No, Mr. Carmody, with all due respect, you are incorrect. The devil is in the details. It is a physical impossibility for Bradley Birkenfeld to have planned and initiated the UBS tax fraud. Here's why.

    The UBS tax scandal not only dealt with assisting American citizens and residents to defraud the U.S Treasury, which had been going on for many years before Bradley Birkenfeld was even born (in the 1960's) but is was focused on the UBS scheme to violate the Qualified Intermediary Agreement ("QI"). The QI became effective in the year 2000 and UBS admitted in the famous Deferred Prosecution Agreement that the bank had been knowingly violating the QI since the year 2000, the very year of its inception. Bradley Birkenfeld did not even start working for UBS until the autumn of 2001. So it's quite clear that he could not possibly have "planned and initiated" something that was already fully up and running before he even joined the bank.

    And you overstate his involvement. He was actually head-hunted away from Barclays to join UBS. He had fewer than 30 clients at UBS whereas his collegues had between 200 and 300 clients each. He was one of about 50 or 60 on "The American Desk" and the new kid on the block at that. Hardly a central player. Many of these clients he actually inherited when he joined UBS. They were already clients when he came on board. Furthermore, he worked at UBS for only 4 years. And he never owned more than one home. That's really urban legend.

    Yet he exposed over 19,000 clients to the United States DOJ, IRS, SEC and Senate. Do the math: fewer than 30 clients out of over 19,000 clients.

    And the 60 Minutes piece really has nothing to do with the issue of "planning and initiating" but the diamonds were typical for the types of gifts that UBS bankers would bring with them when they visited clients. The diamonds at issue were worth less than $10,000, beneath the gift tax threshold and also beneath the customs declaration threshold. So this had nothing to do with laundering anything, your suspicions notwithstanding.

    These are the stubborn facts that utterly refute that he could be in any way be considered one who "planned and intiiated" either the QI violation or the larger tax fraud that had been going on for decades.

    Your assertion that "involvement" is somehow synonymous with "planned and initiated" not only ignores the significant 2006 change in the law but it turns the English language on its head. These terms have very different meanings, as Senator Grassley stated in his slam of IRS Commissioner Shulman last September. Further, "knew or should have known" simply does not enter into the equation as the law is written.

    Most people can agree that it is fair and just for disingenuous bureaucrats to be called to the carpet whenever they pull a stunt like this, so shed no tears for Mr. Shulman and his chief counsel.


    Your refusal to acknowledge that the UBS scheme would not have been brought down but for Mr. Birkenfeld can be effectively rebutted by what the lead DOJ prosecutor said about Mr. Birkenfeld in open court. Upon questioning by a federal judge, the prosecutor said that the U.S. government would probably never have found out about what UBS was doing and that the fraud would probably still be ongoing if Mr. Birkenfeld had not come forward to inform the government about it.

    The IRS says between $3 Billion and $4 Billion will be recovered as a result of the efforts initiated after Birkenfeld uncovered this. Birkenfeld is the $4 Billion Whistleblower, a mark that will probably never be matched.

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  9. One more thing on this. Conviction of a crime does not, in and of itself, preclude a reward under the IRS program. It merely permits a lower-end-of-the-scale percentage of a reward. Being convicted is conclusive evidence of "participating in" the fraud. But the standard of "participating in" is the old standard to bar a reward. It was replaced with the new standard (in the 2006 law) with the much higher bar of "planned and initiated".

    Gone are the days when the IRS can have their enforcement arm, the Tax Division of the DOJ, target a whistleblower for conviction in order to avoid having to pay a whistleblower reward.

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    1. I would be surprised if DOJ Tax's decision related to Mr. Birkenfeld's potential for whistleblower rewards.

      Moreover, I suspect that there are many wrinkles in Mr. Birkenfeld's case that are relevant to his entitlement to a reward. I am sure that he has great counsel who will press his case as hard as skillfully as it can be pressed because, I suspect, they have an economic interest in the ultimate reward.

      Jack Townsend

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    2. Yes, agreed Jack. Regarding Mr. Birkenfeld, I was working from media reports, and few of those. I was offering the other side of the position, as best I could, but I have no dog in the fight. You, whoever you are, seem to have a command of relevant detailed facts, and I wish Mr. Birkenfeld the best in his pursuit of a reward for his whistleblowing, which, as Jack states, competent counsel (hopefully) will be able to present clearly to the Tax Court, though I suspect Mr. B's experience with lawyers may be less than satisfactory!

      However, I disagree with your statements regarding nefarious conduct by Comm. Shulman and OCC for the reasons given, though I can appreciate your frustration with the system, a frustration shared by many. WBs give up a lot to bring information to the attention of IRS (Mr. B is a poster child for that statement) and the IRS system does not seem to reciprocate appropriately, the reasons for which people like Mr. B will bring to the attention of the public, hopefully.

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    3. Through the looking glass one last time:

      The statute eliminates rewards for a WB who is convicted of "criminal conduct" for his or her role in "planning and initiating" the reported tax underpayment. §7623(b)(3), second sentence:

      http://www.law.cornell.edu/uscode/text/26/7623

      "If such individual is convicted of criminal conduct arising from the role described in the preceding sentence, the Whistleblower Office shall deny any award."

      Contrary to what Anon. writes above, the WBO has absolutely NO discretion to reduce rewards in those circumstances--the statute prohibits payment of reward.

      One might try to slice the salami on what "planning and initiating means--whether the statute should be construed narrowly in the interest of attracting WBs to the IRS program--but there is no dispute that if a "planner and initiator" is convicted criminally (whether felony or misdemeanor), no reward is permitted under the statute.

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    4. Good point, Patrick.

      But, could the salami be sliced another way. Could Mr. Birkenfeld be disqualified with respect to the clients he worked on but not with respect to some or all of the other clients with whom he had no contact or relationship and thus did not participate in any way in their fraud. He did not design the system; if he had, he would be infected for all involved; but he did not. He was just a cog in the wheel, touching only those with whom he dealt and for whom he should be disqualified.

      The Regs seem to require that the whistleblower identify the taxpayer. Perhaps Mr. Kirkenfeld could not do that with respect to U.S. taxpayers other than his clients (for which he would be disqualified because of his participation).

      But, in any practical sense, Mr. Birkenfeld was the fulcrum that gave the IRS the information about the other clients, so that it seems a bit self serving for the IRS to deny the claim for the reason that he was culpable as to his clients (really he was prosecuted for his behavior in the disclosure process).

      I have heard, for example, of a person identifying a particular abusive aka fraudulent tax shelter being promoted, but could not identify any taxpayer that actually bought it. If indeed it were a fraudulent tax shelter, the IRS could easily get the names by its compulsory processes (summons or subpoena). It would seem to me that, if indeed the IRS takes that information and identifies the taxpayers even though the whistleblower could not, the whistleblower should get a reward. While this is not Mr. Birkenfeld's circumstance, it seems to me that it argues against too narrow an application of the statute and that might work in Mr. Birkenfeld's favor.

      Jack Townsend

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    5. Yes, I agree the easy case for the IRS's denial of reward is where WB's "planned and initiated" the precise thing that he or she reported to the IRS--a direct connection. The situation becomes more nuanced if, as you you suggest, the IRS discovers tax misconduct attributable to the reported conduct, but not the reported conduct itself.

      For a different aspect of the reward process, Dir. Whitlock has said as much in a transcript of an interview I found (which I have e-mailed to you as I don't know how to link it to this comment share with you) that your readers may find interesting.

      In that interview, Mr. Whitlock said that if discovered other issues in the context of a WB report, even though those issues were NOT reported by the WB to the IRS, if the IRS would not have discovered tax misconduct BUT FOR the WB's information, the WB would get a reward. Therefore, so long as the WB brings the tax miscreant to the attention of the IRS, the WB will get a reward, which makes sense because the IRS should not expect WBs to be experts in the tax law (that is the IRS's function)--the IRS simply wants WB to present the facts, leaving it to the IRS to figure out if there are tax law violations, a sensible, coherent approach to a WB statute.

      This BUT FOR test weighs in favor of Mr. Birkenfeld and it is difficult to see how Mr. Whitlock can apply that analysis in one context and not apply that standard in a slightly different one, especially when it is logical and seems to be what the statute requires at least in the context Mr. Whitlock was addressing.

      Thanks for your thoughtful response Jack.


      PATRICK CARMODY

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    6. I look forward to receiving the transcript of the interview. I have not received it yet; if you already sent it, please re-send.

      Thanks

      Jack Townsend

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  10. Jack,

    Although this may not be the appropriate forum, many of the comments above indicate an interest in IRS process in connection with IRS WB cases.

    The recent case of Insigna v IRS may interest many of the commentators above. Mr. Insigna is an IRS whistleblower who provided substantial information to the IRS over the course of about 4 years which resulted in the recovery of over $1B, if the petition is correct. Now after getting his information Mr. Insigna believes the IRS is gaming him and refusing to pay.

    The petition filed with the Tax Court intrigued me as the allegations set out in the petition suggest pretty high-handed conduct on the part of the IRS. Of course, allegations are just that, unproven statements the veracity of which are to be proven.

    If true, however, the allegations indicate that there are factions within the IRS that are attempting to upset the IRS WB program by simply holding a reward case in limbo indefinitely. And that ain't kosher.

    This peremptory type petition may interest Mr. Birkenfeld's counsel, some of whom seem to be commenting above.

    I will e-mail you the petition separately for attachment if you decide to publish.


    PATRICK CARMODY

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    1. Mr. Carmody,

      I have seen the Insigna petition. It tells one side of the story. I am less suspicious of the IRS than many are. Overall, I think the IRS is a great agency in which the country and all its citizens should be proud.

      Any time a new regime is implemented, the administrators have a very tough job in which case they can be damned if they do and damned if they don't. So, I think we should withhold judgment until the IRS side of the story is told.

      The IRS does have to get it right (right is not a finite point, but a range). Getting it right in a new regime takes time, takes process, takes hearing from and considering from many constituents, and then takes judgment to make a reasonable conclusion.

      I don't think we, who are outside the process, should make any conclusions until we have all the facts and until we are sure there has been time to let the process work.

      Unless the IRS has really done something wrong, I suspect that this peremptory strike will and should fail.

      I heard recently from a very wise practitioner that Mr. Whitlock, the head of the WB office, is a decent reasonable guy. Let's see if he acts decently and reasonably. That will take more time.

      Thanks for your interest in the blog and your comments that always raise good points.

      Jack Townsend

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    2. Thanks Jack

      I agree with your sentiment regarding the IRS. Having re-read the Insignia petition again, the confusion may reduce down to a communication breakdown between the IRS and Mr. Insignia. We will see if this case develops beyond the allegations, which I doubt.

      One of the main IRS employees named in the Insignia petition is Kyunghee Piriano from the Manhattan LB&I. I know Ms. Piriano professionally and would vouch for her without limitation. She is very smart, very professional and I would bet my last dollar that she would have nothing to do with anything untoward or high-handed, despite the allegations contained in the petition.

      I also agree with what you say regarding Mr. Whitlock and I can't see him putting his career in jeopardy over a single case like Mr. Insignia presents. As you say, time will tell all.

      Thanks again for giving me the opportunity to comment, and for your thoughtful responses.

      PATRICK CARMODY

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